Time Magazine 2013 Annual Report Download - page 89

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
film or television program in that exhibition and expenses such costs as the film or television program is
exhibited. The period over which ultimate revenues are estimated is generally not to exceed ten years from the
initial release of a motion picture or from the date of delivery of the first episode of an episodic television series.
For an episodic television series still in production, the period over which ultimate revenues are estimated cannot
exceed five years from the date of delivery of the most recent episode. Management updates such estimates based
on information available during the film’s production and, upon release, the actual results of each film. Changes
in estimates of ultimate revenues from period to period affect the amount of production costs amortized in a
given period and, therefore, could have an impact on the segment’s financial results for that period. For example,
prior to a film’s release, the Company often will test market the film to the film’s targeted demographic. If the
film is not received favorably, the Company may (i) reduce the film’s estimated ultimate revenues, (ii) revise the
film, which could cause the production costs to increase, or (iii) perform a combination of both. Similarly, a film
that generates lower-than-expected theatrical revenues in its initial weeks of release would have its theatrical,
home video and television distribution ultimate revenues adjusted downward. A failure to adjust for a downward
change in estimates of ultimate revenues would result in the understatement of production costs amortization for
the period. The Company recorded production cost amortization of $3.873 billion, $4.092 billion and $4.040
billion in 2013, 2012 and 2011, respectively. Included in production cost amortization are film impairments
primarily related to pre-release theatrical films of $51 million, $92 million and $74 million in 2013, 2012 and
2011, respectively.
Barter Transactions
Time Warner enters into transactions that involve the exchange of advertising, in part, for other products and
services, such as a license for programming. Such transactions are recognized by the programming licensee (e.g.,
a television network) as programming inventory and deferred advertising revenue at the estimated fair value
when the product is available for telecast. Barter programming inventory is amortized in the same manner as the
non-barter component of the licensed programming, and Advertising revenue is recognized when advertising
spots are delivered. From the perspective of the programming licensor (e.g., a film studio), incremental licensing
revenue is recognized when the barter advertising spots received are either used or sold to third parties.
Multiple-Element Transactions
In the normal course of business, the Company enters into multiple-element transactions that involve making
judgments about allocating the consideration to the various elements of the transactions. While the more common
type of multiple-element transactions encountered by the Company involve the sale or purchase of multiple
products or services (e.g., licensing multiple film titles in a single arrangement), multiple-element transactions
can also involve contemporaneous purchase and sales transactions, the settlement of an outstanding dispute
contemporaneous with the purchase of a product or service, as well as investing in an investee while at the same
time entering into an operating agreement. In accounting for multiple-element transactions, judgment must be
exercised in identifying the separate elements in a bundled transaction as well as determining the values of these
elements. These judgments can impact the amount of revenues, expenses and net income recognized over the
term of the contract, as well as the period in which they are recognized.
In determining the value of the respective elements, the Company refers to quoted market prices (where
available), independent appraisals (where available), historical and comparable cash transactions or its best
estimate of selling price. Other indicators of value include the existence of price protection in the form of “most-
favored-nation” clauses or similar contractual provisions and individual elements whose values are dependent on
future performance (and based on independent factors). Further, in such transactions, evidence of value for one
element of a transaction may provide support that value was not transferred from one element in a transaction to
another element in a transaction.
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